What is a disabled persons trust?
A disabled persons trust (also known as a disabled discretionary trust and a vulnerable persons trust) is trust used to benefit a disabled beneficiary. The trust will name a principal beneficiary and whilst they are alive, the trustees will apply both the income and capital of the trust for the principle beneficiary’s benefit as they see fit.
The trust will also name a class of other beneficiaries. The trustees may also, at their discretion, benefit the other beneficiaries whilst the principal beneficiary is alive. They can only benefit them up to a total of either £3000 or 3% of the capital held in the trust, whichever is lower in value, per annum. This amount will be shared between the other beneficiaries.
On the death of the principle beneficiary, the trust will continue as a standard discretionary trust for the other beneficiaries.
There are a number of reasons to use a disabled persons trust.
If the primary beneficiary inherits from the will directly, their entitlement to any means tested benefits they receive could be affected.
The Local Authority will want to assess them once they have received their inheritance. If a disabled person holds assets over a certain threshold (which can vary) the Local Authority may consider that they can now financially support themselves and reduce the benefits that they receive.
By placing the principal beneficiary’s inheritance into a disabled persons trust on death, it is ensured that the benefits are protected as the trust will own the inheritance rather than the principal beneficiary outright. The trustees will usually then manage the inheritance in such a way that ensures that the benefits are not affected.
Managing assets for the beneficiary
A disabled person may be unable to manage a large sum of money. By placing the inheritance into trust, the trustees will be able to manage that inheritance for them.
If the disabled person also lacks mental capacity, inherited outright and did not have a Property and Financial Affairs LPA, it is likely that an application would have to be made to the Court of Protection to appoint a Deputy so that the inheritance can be managed. This is a lengthy and expensive process and incurs ongoing costs and should be avoided.
Whilst a discretionary trust could also be used to do both of the above, a disabled persons trust has some IHT advantages over a discretionary trust.
Whilst the principal beneficiary is still alive the disabled person trust is treated as an interest in possession trust, despite working similarly to a discretionary trust. The trust is not subject to anniversary and exit charges whilst the principal beneficiary is alive. However, once the principal beneficiary passes away, the trust fund is seen as part of their estate for IHT purposes and is therefore taxed if their estate is over the NRB.
After this, the trust will continue as a discretionary trust for the other beneficiaries. There is a five-year grace period after the death of the principal beneficiary in which no anniversary and exit charges will apply. During this grace period, the Trustees can, and often will, wind up the trust and distribute the assets to the other beneficiaries without any exit Charges.
If the Discretionary Trust does continue past the five-year grace period, exit charges will begin to apply and the first anniversary charge will occur ten years after the end of the grace period (fifteen years after the principal beneficiary’s death).